Contractors, like everyone else in the business community, are always suffering from lack of cash. This is especially true these days. Let's talk about maintaining the inflow with closer attention to collections. Important items to consider are:
- Contract Terms
- Prompt Billing
- Proper Format
- Watching for Overdue Payments
- Making Collection Calls
Contract Terms
One of the interesting things about construction is the rules and the fact that there a few or none in the private sector. There are more in the public sector, but, depending on circumstances, even these are negotiable. Here are the four major areas of concern:
- Bill Points – The contract should specify how much can be billed and when. The object is to "front" load the contract, if possible, so your expenses are covered by income vs. borrowing on your credit line. Further, bill points should be clearly described so there is no confusion about timing. Private contracts might even have bill points specified on the Gantt Chart schedule.
- Change Order Billing/Claims Billing – Billing for these items can be done as soon as the work is complete if addressed properly in the contract. Waiting to completion only increases the likelihood they will not get paid.
- Retention – Again, if properly addressed in the contract, perhaps we can collect retention much earlier than the end of the job.
- Finance Charges – This is a touchy area. We suggest your contract address finance charges just in case. However, forcing the issue to collect them might be a different matter.
Prompt Billing
This is the one area most contractors can get the most results for the least effort. We simply need to make sure we are billing as soon as we can; not when we get around to it. Your contract will usually say the bill is due a certain number of days from the invoice date. So, if the bill is delayed a week, you can be pretty well assured the payment will be delayed a week. For larger bills this can get a little expensive. Just think about the daily interest on a large bill like $100K. At 6% interest it's almost $17/day.
Let's look at a contract with 30 day terms where the billing got delayed a couple of weeks vs. 15 day terms that got billed promptly. The difference is the 15 days plus the 10-day delay for a total of 25 days. At 17/day the total comes to $425. If you are billing $5,000,000 per year and this happens every time, your cost is 50 x $425 or over $20,000!!
The second major danger to late billing is the increased chance of not getting paid!
Proper Format
Many contracts will specify the appropriate format for an invoice like the AIA 702 and 703. If it does not, we think it is important to give the client enough information to make it easy for them to pay the bill; not too much and not too little. Too much confuses and too little makes it harder for them to write the check. Either of these may delay payment!
Watching for Overdue Payments
We think someone should be watching the AR Aging report on a daily basis. If payment is not received by the day it is due, someone needs to make a call. Of course, someone should have already made the call to see if the invoice was received. How about calling a couple of days after the invoice is sent to ask that question?
Making Collection Calls
Here's where you might think about formalizing the process and delegating the everyday collection efforts. Here is a step-by-step that might serve as a guideline for your company. Please understand this is a guideline. Maintaining relationships with your clients is a key to your success. Use these guidelines and some common sense to collect your money.
- All contracts, where appropriate, will have proper pre-lien notices filed before work begins.
- Bills will be prepared in the appropriate format and submitted to the client the day they are due.
- Itemized Statements will be sent to the client monthly.
- For invoices over $5,000
- A follow-up call will be made to the client or the client's Accounts Payable representative (APR) to make see that the bill was received. This call will be duly noted on the invoice.
- If the payment has not been received on the due date, our Accounts Receivable representative (ARR) will call the client or APR and inform them that payment has not been received. If the check has not been sent, our ARR will:
- Ask why payment has not been sent
- Rectify an problems if appropriate
- Determine when check will be sent and when we can expect its receipt
- Offer to personally pick up the check
- Offer to accept payment on a credit card
- Duly note the result of the conversation
- Send a letter, fax, or email to the client with a summary of the conversation.
- If payment has not been received on due date + 2 days, our ARR will again contact the client's APR and perform the same steps above. Send a 2nd more strongly-worded letter to the client.
- If payment has not been received on due date + 5 days, our Project Manager (PM) will contact the client and repeat process.
- If payment has not been received on due date + 10 days, our owner will contact the client and repeat process. Send a stop work notice to the owner certified mail with return receipt requested.
- If payment has not been received on due date + 15 days, our owner will contact the client and repeat process. Send our attorney appropriate paperwork and note to begin legal proceedings.
